The spread between India and the U.S. 10-year bond yields has narrowed below 400 basis points, turning the local notes unattractive in the face of the currency risks. "The impact (of Silicon Valley Bank collapse) on India market has been muted," First Sentier Investors' Nigel Foo told Reuters in an interview.
The failure makes it harder for the U.S. Federal Reserve to continue hiking rates, but it remains to be seen how quickly it can stabilise the market and prevent a spillover to the rest of the economy, Foo said.
"We have an even more positive bias for U.S. duration. Valuation is looking rather expensive here given the spread between IGB (Indian government bonds) and UST (U.S. Treasuries) is at the tightest level in over a decade."
India's benchmark 7.26% 2032 bond yield was
at 7.36% on Friday, while the 10-year U.S. yield was at 3.55%
after rising to as high as 4.09% earlier this year following a
233 bps jump in 2022.
Last week, California banking regulators shut down SVB,
which had $209 billion in assets at the end of 2022, while
Credit Suisse received help from the Swiss central bank to shore
up its liquidity, allaying investors' concerns of contagion.
While the Reserve Bank of India looks set for another rate hike in April, it could persist on the policy tightening path, which makes it tough to predict the terminal rate, Foo added. "In the United States, despite the current economic strength, it is expected that growth will slow down in the second half of the year due to tightening financial conditions." The Federal Reserve has raised rates by 450 bps since March 2022 to 4.50%-4.75%, while the RBI has hiked by 250 bps during the same period to 6.50%.
Foo expects yield on the benchmark Indian bond to stay in the 7.40-7.60% band, with demand from foreign investors and local banks declining in the new financial year that begins next month.
As credit in the private sector expands, the demand for government securities could decline, Foo said.
"Potentially, there would be a situation where demand might be lower than supply and the RBI would need to step in to cover the shortfall." Meanwhile, the Indian rupee has performed "poorly among other Asian high yielders," which turns the purchase of government bonds less attractive, he said.
"We are neutral on INR outlook, a lot is dependent on the U.S. fundamental picture and broad dollar direction." The Indian rupee was at 82.48 against the dollar and has depreciated since last few days. (Reporting by Anushka Trivedi and Dharamraj Dhutia; Editing by Dhanya Ann Thoppil)
